3. Innovative funding and business models for energy efficiency in public buildings

The building sector in the Philippines is one of the largest consumers of electricity in the country, with roughly 15-20% of nationwide electric power consumption. Under the 2017-40 Energy Efficiency and Conservation Plan, the Philippines aims to achieve annual reductions of 1.2% and 1.9% in energy consumption within the residential and commercial sectors, which includes public buildings.

The government is also expected to play a key role in taking the lead to institutionalise and promote energy efficiency and conservation across all sectors in the country. One of the measures that was particularly strengthened under the Energy Efficiency and Conservation Law of 2019 is the implementation of the Government Energy Management Program (GEMP). The GEMP requires all government offices, including Local Government Units (LGUs) to reduce monthly electricity and petroleum products consumption by 10%, compared to 2004 and 2005 levels.

In support of these initiatives, the DOE issued a set of guidelines in May 2023 for strengthening skills and capacities for Energy Efficiency and Conservation (EEC) professionals1. These guidelines include the appointment of EEC coordinators in all government agencies, tasked with assisting EEC Officers and focal staff in implementing energy efficiency and conservation measures in their own offices/buildings. Additionally, the guidelines encompass the adoption of training modules and a certification process to recognize training institutions, reinforcing skills and capacity building for EE&C professionals in the public sector.

The government maintains that a successful implementation of the GEMP will set an example for the Philippine energy efficiency market, which currently remains in its infancy. As of 31 May 2023, the public sector has recorded a total electricity savings of 20.67 million kWh throughout the duration of the GEMP. This shows the potential of government buildings in terms of energy efficiency and conservation.

Despite these developments, the GEMP faces challenges in achieving widespread compliance. To date, just under half of government entities are compliant. This roadmap chapter focuses on near- and medium-term actions to incentivise higher energy efficiency amongst LGUs.

The government maintains that a successful implementation of the GEMP will set an example for the Philippine energy efficiency market. To provide strategic direction, improve the adoption and accelerate the implementation of the GEMP, the EE&C act mandated the creation of the Inter-Agency Energy Efficiency and Conservation Committee (IAEECC). The IAEECC is chaired by the DOE and has eight government member agencies, namely: the National Economic and Development Authority (NEDA); the Departments of Budget and Management; Finance; Public Works and Highways; Science and Technology; the Interior and Local Government; Trade and Industry; and Transportation. Since 2020, the IAEECC has issued a total of seven resolutions which serve as a guide to all government entities to further the implementation of the EE&C in the public sector (see Annex A).

Under the IAEECC GEMP guidelines issued in 2022, government entities are provided with two financing options to pursue energy efficiency projects in their buildings. To carry out their own Government Energy Efficiency Projects (GEEPs) government entities can choose between the Energy Service Companies (ESCO’s) -based and the Public Sector-Led financial models. The former allows government entities to commission ESCOs through Energy Savings Performance Contracts (ESPCs). The latter allows government entities to implement, fund and/or finance GEEPs without an ESCO and ESPC.

To date, several government entities have chosen to enter an ESPC with an ESCO and have already completed their energy efficiency projects. An example of this is the Commission on Audit Main Office which entered into an ESPC with the Philippine National Oil Company - Renewables Corporation (PNOC-RC) to realise their solar rooftop project.

Furthermore, the DOE is currently drafting updates to the Green Building Code, which should provide further guidance for the construction and retrofitting of buildings. The code will notably define energy efficiency and conservation guidelines for buildings with total floor area of areas more than 10 000 square feet and mandate them to have certified energy efficiency officers or managers. All new building permits (including public buildings) will be bound by these guidelines.

The measures taken so far have generated government savings of an estimated USD 3.7 million as of the first quarter of 2023. Energy efficient technology has been the main driver of these savings, not only for LED lighting but also for cooling via inverter-type air conditioners (Business World Online, 2022[1]). The government is setting the example, but the private sector has also awakened to the potential of energy savings. In addition to 7 441 identified government entities, there are also over 4 000 designated private sector establishments - including commercial, industrial and transportation sectors - implementing various projects to reduce their energy consumption to date.

On the institutional front, the DOE is setting up an energy management team, responsible for adopting a systems approach to boosting the implementation of energy efficiency and conservation measures. This will include a co-ordinated effort to implement energy efficiency, energy use and energy consumption activities. Government commitment has attracted the interest of international investors with proven technologies and experience in energy efficiency.

Achieving the Philippines EE&C Roadmap 2023-2050’s aspirational targets requires mobilising a substantial amount of both public and private capital. The Philippines Energy Efficiency Alliance (PE2), for instance, estimated that achieving the EE&C Roadmap targets by 2040 would require a total USD 243 billion or around USD 10.5 billion annually – an amount roughly 36 times greater than the cumulative energy efficiency investment realised over 2019-21 (around USD 97.7 million annually).

While there is no official estimate of investment needs for energy efficiency in the public sector, existing evidence seems to point to a considerable potential. For instance, according to analysis based on energy data of 178 public buildings,2 upgrading their lighting and air conditioning could help generate PHP 705 million (USD 13 million) of annual savings (equivalent to a 33% reduction in annual electricity consumption or 85 million kWh). This investment would cost an estimated PHP 2.2 billion (USD 39 million) with an average payback period of 3.5 years (World Bank, 2018[2]). This only represents a subset of all existing public buildings. As such, actual energy savings in the public sector are likely to be higher. Creating the right enabling conditions is thus crucial to reap the benefits of that potential.

Since the implementation of the EE&C Act, a few LGUs have made progress towards meeting the GEMP target, allocating resources to energy-efficiency-related research, planning, data collection, monitoring, and maintenance of equipment. These are already seeing results in the form of reduced energy bills. Equally, in some off-grid areas, with heavy reliance on expensive diesel, LGUs have made significant energy efficiency improvements to their equipment – not necessarily with the objective to comply with the GEMP but simply on the grounds that these are good financial investments.

As of the first half of 2023, the total awareness of government entities regarding EEC and the GEMP is at 41.86% based on the co-ordination meetings, information, education and communication campaigns and hands-on GEMP System trainings conducted by the DOE. Despite the awareness, LGUs still experience challenges in complying with the GEMP. Most notably, LGUs continue to face a significant shortage of skills and workforce capacity constraints. Further, LGUs often lack the capacity to plan and undertake energy efficiency projects, conduct energy audits, and do the necessary procurement (e.g. preparation of Request for Proposal/ technical specifications, technical review, bid evaluation, etc.).

To overcome this issue, awareness raising campaigns, capacity building and further incentives were highlighted during several stakeholder consultations as key efforts to support LGUs in adopting energy efficiency solutions and thereby achieve GEMP objectives. Still, other hurdles continue to set back compliance with the GEMP targets.

Budgetary constraint is one of the biggest challenges to the adoption of energy efficiency in the Philippines’ public sector. While targets are ambitious, the Government has very limited budget to fund energy efficiency projects by itself, although it has set aside budget (at the central government level) to fund a few clean energy initiatives. For instance, it has implemented solar rooftop projects in three government buildings3 and has allocated PHP 25 million in the 2023 budget to support energy audits for 160 LGUs.

Still, numerous LGUs do not have sufficient budget to invest in energy efficiency, particularly in poorer and remote areas. Hence, those having made most progress to date are often those LGUs with highest budget and/or those that benefitted from international development assistance. This is compounded by limited access to finance due to the poor financial health of certain LGUs, and the absence of a robust credit rating system for LGUs.

In theory, a solution to alleviate budget constraints, could be to use realised energy savings to repay capital expenditures – which can be funded by debt, leasing or budget. However, current budgetary rules generally disallow the ownership of energy savings, let alone re-using them to repay project’s financial liabilities. Indeed, as budgets are prepared annually, and each annual budget allocation is based on the previous year’s expenditures, any reduction in operating expenditures (i.e. from energy savings) would lead to a decrease in budget allocation the following year. This makes it difficult to repay loans (or leases) from realised energy savings or recover the budget used to fund the initial investment. Even worse, this creates a split incentive wherein the implementing LGUs do not retain the benefits of energy savings (i.e. increase budget availability) and hence, have little to no incentive to make energy efficiency improvements.

To address this issue, the DOE issued Department Circular (DC) 2022-04-0006, titled “Guidelines on the Endorsement of Government Energy Efficiency Projects to the IAEECC Pursuant to the GEMP Guidelines”. This circular outlines the development of Government Energy Efficiency Projects (GEEPs), their implementation schemes, and the DOE’s criteria for evaluating and approving GEEPs. The objective is to empower Local Government Units (LGUs) to allocate their own budgets for energy efficiency within the broader government budget.

Most notably, the circular enables LGUs to accrue and reuse freed-up budget from lower energy consumption (resulting from the implementation of energy conservation measures) for energy efficiency-related capital expenditures. In particular, LGUs that achieve more than 10% (or between 5% and 10%) reduction in energy consumption, are eligible to receive Energy Reduction Cost Certificates issued by the DOE. These certificates can be utilised to either repay or invest in new energy efficiency-related capital expenditures with up to 100% of savings.

While the use of budget with cost recovery should continue to be promoted, it is likely that LGUs implementing their first projects may have to use (at least part) of their own budget to cover investment costs. Given limited LGU budget, allocating greater share of government budget to LGUs while concomitantly diversifying sources of funding and raising additional funds for energy efficiency going forward -- such as through seed capital and by looking into innovative financing arrangements – is important. In this regard, the recent Mandanas ruling raises hope that LGUs may be given additional financial resources in the near future to invest in energy efficiency, although this is yet to materialise.

EPCs are energy efficiency contract models under which a range of services (from project design to operation and maintenance/O&M) related to energy efficiency and conservation are provided to an end-user or its associated facilities by a private entity (typically, an ESCO). Under certain EPC models, the ESCO can provide financing so that the host facility must disburse little to no capital upfront. In this kind of model, the capital is re-paid directly from energy savings, and hence is contingent on the performance of the installed equipment.

EPCs feature several key advantages that could help overcome some of the challenges mentioned above. Among other things, ESCOs can potentially (World Bank, 2010[4]):

  • Help reduce transaction costs, bundling all of the various steps typically required to implement an energy efficiency project into one contract, thereby facilitating public procurement.

  • Transfer technical/technology risks away from public end-users (and financiers) by providing project/equipment performance guarantees and offering O&M services to ensure that the installed equipment continues to perform at appropriate levels.

  • Facilitate access to external capital and offer more flexible financing options for projects, thereby alleviating some of the budgetary constraints that public agencies typically face.

Different EPC models exist globally, of which the two most prevalent are the shared savings and guaranteed saving models, as part of which the ESCO performs most services from design to O&M. In the case of the shared savings EPC model, the ESCO also provides financing, which it reimburses from a percentage of realised energy savings. In the guaranteed savings model, the ESCO guarantees a minimum level of performance but, in turn, the end-user must obtain financing from a third-party, effectively taking on the financing risk. Preference between shared and guaranteed savings vary across countries and regions, often due to different national policy and accounting rules.

Still, a broader range of EPC models exist and have been used globally. The experience of China (one of the world’s largest ESCO markets) shows that the variety of models used evolve as the energy efficiency market matures. Indeed, in 2012, guaranteed and shared savings represented more than 85% of the EPC market against 45% in 2019, the remainder being other forms of EPC models (Efficiency, 2020[5]).

While EPC is an interesting option to facilitate the implementation of energy efficiency projects in public buildings, their public procurement has been particularly challenging. First, multiyear contracting, while legally possible, has proven particularly difficult in practice. This, in turn, affects the financial viability of energy efficiency projects whose payback period more than often exceeds a single year.

Other public procurement rules also make it difficult for LGUs to make energy efficiency improvements. A notable example is the Government Procurement Reform Act (Republic Act 9184) that only allows for the procurement of “pure goods” and “pure services” thereby disabling the procurement of mixed contracts such as energy performance contracts (EPCs) which typically provides bundled contracts. This means that the procurement of elements, typically covered under an EPC, such as (investment-grade) energy audits (to set up a baseline and evaluate potential improvements/investment potential) and equipment must be procured separately, effectively adding extra transaction cost and lead time.

Therefore, LGUs often prefer going through a government or public entity to do their energy audits as such procurement arrangements are far less cumbersome (e.g. no competitive tender is required). Public institutions such as the Philippines National Oil Company–Renewables Corporation (PNOC-RC), the DOE or the Department of Science and Technology (DOST) do provide energy consulting or auditing services to other government entities, among others. The DOE, for instance, has even set a target for itself to audit 100 government buildings in 2023 and for the PNOC-RC to audit around 380 of them.

While these are laudable efforts and actions, they remain small compared to actual number of entities requiring energy auditing. It is also clear that neither the PNOC-RC nor the government has the capacity to audit the 7,441 government entities covered under the GEMP, let alone fill the energy efficiency investment gap in public buildings. As of January 2023, for instance, the PNOC-RC had only audited 80 of the targeted 380 LGU buildings, although it had engaged and visited around 160 of them. Lack of LGUs’ awareness and co-operation with regards to providing access to their facilities’ data and information was also a key impediment to that. Equally, beyond auditing (which is key to identifying opportunities and creating an energy consumption baseline for evaluating energy savings), the PNOC-RC and the government have resources to invest, build and operate energy efficiency projects within government facilities.

As mentioned before, private ESCOs could play a key role in supporting energy efficiency improvements in the Philippines’ public sector, most notably through EPCs. Hence, significant efforts have been made to structure and accelerate the development of an ESCO market in the country. In 2020, the Department of Energy (DOE) issued a Department Circular 2020-09-0018 providing “Guidelines in the Administration Classification and Certification of ESCOs” in a bid to improve clarity and set standards for ESCOs. As per the circular, to be classified as an ESCO, a firm must be registered by the DOE, which is conditioned to meeting a set of basic criteria. Registered firms can also obtain certification, which guarantees a certain level of business (historical) performance. As of June 2022, (DoE, 2022[6]), there were 36 ESCOs in the country, a five-fold increase compared to 2015, of which only seven were certified. While this is an encouraging trend, in reality, only a few ESCOs actually undertake EPCs, which means they still need to develop their technical, business development, and risk management skills and capabilities. Over 2019-21, ESCOs represented 15% of total energy efficiency investment (roughly current USD 317 million), most of which occurred in commercial buildings.

Despite these efforts, the ESCO market in the Philippines remains in its infancy as it is beset by a number of challenges. Most notably, limited access to affordable finance remains one of the most pressing challenges for ESCOs in the country (DoF / LCEP, 2021[7]). Indeed, energy efficiency projects are often perceived as too small and/or risky by financial institutions, often leading them to require high levels of collateral.

While some banks have adopted dedicated financing programmes for which energy efficiency projects are eligible, energy efficiency practitioners consulted as part of the roadmap process continued to highlight difficulties in accessing finance. These include lack of capacity in developing bankable projects and eligibility criteria related to public debt ceilings that don’t allow LGUs to access debt finance.

Equally, the ability to reliably verify energy savings and attribute such savings to the energy efficiency project is also a critical aspect to increase LGU/customer and investor confidence. Hence, ensuring the development of reliable verification systems and protocols (including from a third party) is important to ensure the bankability of investment-grade audits/EPC and avoid claims and counterclaims (at times leading to litigation).

Overall, the relatively low demand for energy efficiency, compared to the country’s energy potential, is an important challenge, which hampers further expansion of the country’s ESCO market. Hence, encouraging government demand for energy efficiency (e.g. through increased compliance with the GEMP) can help kickstart an ESCO market in the country, as has been the case in other jurisdictions. This may include the build-up of a project pipeline that creates a minimum market size and allows private sector ESCOs to gain the experience and track record of successful project implementation. A key pre-requisite for that, however, will be solving existing procurement constraints, among others.

The absence of standards, challenges in securing an adequate workforce capacity, shortages of skills, and the LGU budgetary limitations are some of the main barriers to funding energy efficiency projects in the public building sector. Mechanisms that can support energy efficiency projects in public buildings can include:

  • revisions of public procurement and accounting rules to enable investment in energy efficiency projects with payback periods exceeding one calendar year and allowing for bundled contracts

  • mandatory, well-enforced building energy codes which cover all building types including new construction and existing buildings

  • a focus on training, capacity building and social awareness campaigns across the value chain, including the financial sector

  • concessional finance granted under favourable terms or intermediate lending from international financial institutions to local banks

  • innovation pilot projects that can accelerate deployment based on market driven approaches.

It should be noted that the twin challenges of workforce capacity and adequate skills can be addressed a priori, to ensure a successful implementation of the pilot projects and their potential scale up. This is largely consistent with the need to broaden the scope of private sector participation in public building energy efficiency projects to include private contractors in anticipation of an accelerated deployment post pilot stage.

International experience provides interesting insights into how other countries have worked around some of these well-known public procurement restrictions, and which could be adapted if not replicated in the Philippines’ context. One example is the public ESCO model – also known as Super ESCO.

The Super ESCO model has been adopted by numerous countries, typically to kickstart the nascent, local energy efficiency market. Indeed, by supporting the adoption of energy efficiency solutions in the public sector (e.g. hospitals, schools, municipal utilities, government buildings and other public facilities), these have often supported the capacity development and project development activities of existing private ESCOs (e.g. subcontracting, reducing transaction costs, provision of financing, etc.). A key advantage of a public Super ESCO resides in the fact that these very often do not have to go through a (often cumbersome) public procurement/tendering process for project development, since in this case one public agency is simply contracting with another public entity. On the financing side, the super ESCO benefits from a greater creditworthiness compared to smaller private-sector ESCOs, leading to easier access to finance. Other advantages of the Super ESCO structure relate to project aggregation and standardisation, thereby lowering transaction costs and creating scale, while better meeting financier's requirements.

There are variations in the way Super ESCOs operate globally, both in terms of structure and operations. In China, for instance, state-owned ESCOs (also known as energy management companies) were established to act as for-profit ESCOs whose initial role was to support the development of the country’s energy efficiency market, focusing largely on the industry sector.

In Croatia, a super ESCO was established within the country’s public power utility to support local government institutions’ uptake of energy efficiency projects. In other countries, the Super ESCO has had a more traditional role, acting as the main (if not the sole) responsible entity for energy efficiency project implementation in public facilities, subcontracting work to private ESCOs (e.g. in Saudi Arabia or United Arab Emirates). In India, for instance, the Energy Efficiency Services Limited – or EESL, the country’s Super ESCO – has played a key role in facilitating energy efficiency project development in the public and residential sectors, including through large-scale procurement programmes to reduce transaction costs through aggregation, and through providing financing solutions for end users. Global examples of Super ESCOs are highlighted in Box 3.2.

The Super ESCO concept is not new to the Philippines. In 2008, the state owned PNOC-RC was established as a subsidiary of the PNOC (the national oil and gas company) to provide clean energy services, including energy efficiency. Taking on the role of a public Super ESCO, and using a shared-saving model, the plan was for PNOC-RC to provide financing and technical services, and conduct the operation and maintenance of equipment for public agencies, in exchange for an agreed-upon monthly fee. To implement its energy efficiency and demand-side management projects, PNOC-RC would be allowed to subcontract private ESCOs (through competitive tender) with the objective to help develop an ESCO market. It also was to undertake information and education campaigns and conduct forums on energy efficiency and conservation. However, the role of PNOC-RC remained only within energy efficiency consulting and energy audit services. Acting as a Super ESCO would have important budget implications to be considered due to the significant resources and increased institutional capacity required.

More recently, private sector initiatives have taken the role of the aggregator entity in the Philippines. Climargy is a private sector initiative in the Philippines that serves as a commercial Super ESCO aggregator of ESCO project assets, fully funded with private capital. Climargy is also tapping into grant funding through a partnership with UNOPS Southeast Asia Energy Transition Partnership. The company is planning to use these grants to subsidise and de-risk the upfront development costs of energy audits for energy efficiency projects in commercial and industrial entities (UNEPCCC, 2023[9]).

Another potential option to procure (and finance) energy efficiency projects in the Philippines is through PPPs, which have been widely used globally to fund large infrastructure projects, such as airports, toll roads or power plants. PPPs are contracts entailing a long-term contractual agreement between the government and a private sector partner. The private party is often responsible for the design, construction, financing, operation, management and delivery of the service for a pre-determined period, receiving its compensation from fixed unitary payments (i.e. availability payment) or user-fees.

PPP models have been successfully implemented in the Philippines, with several airports, dam and toll road projects having been developed (OECD, 2016[11]) (PPP Centre, 2022[12]). This was greatly aided by a comprehensive legal framework for PPP, notably enshrined in the BOT Law passed in 1987. Notwithstanding, PPPs have been largely untapped in the renewable and energy efficiency sectors. This is explained by, first, the lack of familiarity with clean energy projects of LGUs as well as, in many cases, their limited experience in undertaking complex contractual arrangements (including evaluating solicited and unsolicited proposals). Equally, the fact that current PPP documents and procedures are still geared towards traditional, large-scale infrastructure projects makes it difficult to design PPP models adapted to the size and characteristics of energy efficiency projects. Still, while these issues are common globally, some countries have already developed PPP models for energy efficiency, with promising results. This is notably the case of Indonesia, which implemented a pilot project in Surakarta city (see Box 3.3).

To address these issues, there is a need to continue developing the capacity of LGUs, notably through targeted training activities for government officials (e.g. on the design of PPP programme, evaluation of project proposals and value for money, organisation of tenders from pre-selection through to monitoring of PPP implementation). Similarly, project development and transaction advisory could help government agencies and LGUs develop a pipeline of energy efficiency PPP projects. In this regard, the PPP centre (a government body dedicated to the promotion of PPP models in the country) has been active and providing training on PPPs, albeit not yet specifically on energy efficiency.

Training activities could draw from the experience of some LGUs, which are more advanced in developing their own sub-national PPPs. For instance, the Provincial Government of Albay, Bicol has notably been implementing ordinances for pursuing their PPP programme, offering a streamlined and simplified approval process that complies with national policy and guidance. The Mandanas-Garcia ruling by the Supreme Court in 2018, spearheaded by Batangas, which strengthens fiscal decentralisation among LGUs, was also raised in relation to sourcing funds for energy efficiency projects. At this point in time, this is the exception rather than the rule.

Furthermore, given the small size of energy efficiency projects, devising means to aggregate projects and implement them through PPPs is important to overcome this challenge. While a Super ESCO would be well placed to do that, there exists other potentially helpful conduits to achieve that, in the meantime. For instance, the provincial government could help co-ordinate and aggregate projects/buildings at the municipal/district level and structure them as PPPs. Economic zone authorities4 or state universities, which cover areas with numerous public facilities, could also be well placed to identify and aggregate projects.

In light of constraints regarding the government budget and the funding of energy efficiency projects entirely through cost recovery, tapping debt finance may be necessary to finance projects. Tightening public finances during the COVID crisis called for caution, however. In Q4 2022, the national government’s (NG) debt reached a historically high level (PHP13.42 trillion) and stood at 60.9% of GDP according to the Bureau of Treasury. Fiscal deficit also widened from 3.4% in 2019 to 7.3% in 2022 (albeit down from a peak of 8.6% in 2021). Regardless, the country’s debt burden remains relatively sustainable – e.g. external debt as a percentage of the GDP was recorded at 27.5%  as of end-December 2022, while foreign currency reserves are at a sound level during the same period. Also, public finances are expected to improve as the economy recovers and returns to pre-pandemic levels.

At the subnational level, the situation is considerably different. LGUs’ debt level amounted to less than 1% of GDP in 2022, despite the recent devolution of central government activities (Philstar, 2022[14]). Equally, only 62% of LGUs have borrowed money over the last five years while the Bureau of Local Government Finance estimated that LGUs utilise less than 50% of their borrowing capacity.

LGUs are in theory allowed to access credit from commercial banks, whether public or private. However, in 2022, most outstanding loans were provided by state-owned banks (mainly from the Development Bank and the Land Bank of the Philippines). Prior to contracting a credit, LGUs must obtain a Certificate of Net Debt Coverage and Borrowing Capacity from the Department of Finance. Most notably, this document certifies that current debt service payment of LGUs do not exceed 20% of their annual regular income.

Credit facilities exist to support energy efficiency in public buildings. For instance, the Land Bank of the Philippines has put in place a special credit facility to fund energy efficiency-related expenditures for government entities (including LGUs). Still, few LGUs have availed of such credit facility, again pointing to a considerable lack of LGU awareness around energy efficiency and conservation opportunities.

The global green bond market has grown substantially over the last years. Taking advantage of this opportunity, the Philippines has issued several green bonds, the proceeds of which were, in part, used to fund energy projects. Still, most of the country’s issuances came from the private sector, contrasting, for instance, with neighbouring Indonesia (another leading regional green bond issuer) whose green bonds were mostly issued at the sovereign level. Yet, green bond issuances could be a potential avenue to fund both central and local government’s energy efficiency related investment, particularly as global investors scramble for green financial products. As the economy (and public finances conditions) recovers, this could be a potential financing avenue for the government to consider.

Municipal green bonds could also be an interesting source of financing for LGUs in the future, once LGUs are more at ease with bank lending and borrowing in general. Mexico City offers interesting insights into the potential for municipalities to tap the local or international green bond market. Indeed, the city is one of the very few municipalities of emerging economies to have issued a municipal green bond in 2017 to fund energy-efficient street lighting, railway transit as well as other sustainable sectors. The MXN 1-billion bond (with a five-year tenor) was rated triple A and was largely over-subscribed (Environmental Finance, 2017[15]).

Nevertheless, bond finance still represents a negligible share of total Philippine LGU borrowing (BLGF, 2022[16]). Hence, government has plans to foster LGU access to financial markets, notably through developing a municipal credit rating system to help build investors’ confidence. As it does, it will also be important to concomitantly enhance LGUs’ technical capacity to both raise funds in capital markets and bundle energy efficiency projects together (World Bank, 2018[2]).

Blended finance mechanisms including technical assistance can help support the financial structuring and enhance the risk profile of energy efficiency projects, notably through de-risking mechanisms. These could, for instance, take the form of first loss or non-payment guarantees as well as project preparation support to improve the capacity of project developers and financial institutions to access both domestic and international debt finance. Blended finance is typically administered by development finance institutions, whether domestic or international.

Based on stakeholder consultations, we showcase two potential blended finance instruments that were highlighted as having a high potential to mobilise private investment for energy efficiency in public building.

An energy efficiency revolving fund typically provides debt (and sometimes equity) financing to a government agency or private company to cover the investment cost of energy efficiency projects, which is then paid back from energy savings. Repayments (which often includes top-up charges in the form of interest or dividend payments) are then used to finance additional projects, thereby allowing the capital to “revolve”. Energy efficiency revolving funds are typically capitalised using budget funds and/or international development finance. A key advantage of such funds is that they often offer lower rates than commercial bank loans while allowing a more efficient use of public money thanks to the fund’s returns. In addition, the fund can be an effective way to demonstrate the viability of energy efficiency projects and help support market development.

Energy efficiency revolving funds have been used in several jurisdictions. This is notably the case of the energy efficiency and ESCO revolving funds in neighbouring Thailand. In particular, the ESCO revolving fund offers both access to a revolving credit line as well as equity financing to projects. The provision of equity funding is especially important to help facilitate ESCOs’ access to finance and increase their borrowing capacity (see Box 3.4).

A risk-sharing facility can help overcome the high perceived risk of energy efficiency projects. Acting as a guarantee, such a facility can help backstop a variety of risks, particularly those related to credit risks or energy savings. Such a facility can help lower the cost of financing of LGUs and project proponents. It can take the form of, for instance, a partial credit guarantee or a first-loss mechanisms (wherein the guarantor absorbs losses until a certain maximum amount). India’s Partial Credit Risk Sharing Facility for energy efficiency is a good example. This facility provides partial default risk coverage to 14 partner financial institutions on loans to energy efficiency projects implemented by 18 approved ESCOs via energy savings performance contracts; it also provides technical assistance and capacity building to ESCOs, which are key enabling factors in risk sharing facilities (OECD, 2022[17]). Thailand’s credit guarantee facility (discussed in Box 3.4) under its ESCO revolving fund is another illustration.

In the same fashion, the ESI model is another option to help guarantee proceeds from energy savings through an insurance policy (usually covering a period sufficient to recover the investment). The ESI model was first pioneered by the Inter-American Development Bank (IDB) (IDB, 2020[18]) in Colombia and, due to its success, it is now being replicated in Brazil, Chile, Mexico and other Latin American countries, usually in co-operation with national development banks. The core components of an ESI model include a standardised EPC, an independent validation, the energy savings insurance and a financing structure or credit line, often structured under concessional terms. Newer projects have also integrated a digital monitoring platform. It is currently also piloted in a few select countries in Europe, as well as Morocco. While ESI schemes main focus so far has been on the MSME sector, such a model could potentially be adapted also for LGUs.

The Government of the Philippines has been taking key actions to accelerate finance and investment in energy efficiency projects. A lot of efforts are underway to improve the energy efficiency of public buildings, benefiting from existing legislation (Republic Act No. 11285). These will be important to meet the country’s clean energy goals as well as the objectives of the Paris Agreement. To support these efforts, this Roadmap highlights six recommendations to support the Philippines’ efforts.

The updated National Energy Efficiency and Conservation Plan (NEECP) provides an opportunity to mainstream energy efficiency into LGU plans and activities.

  1. i. The updated National Energy Efficiency Plan (NEECP) 2023 – 2050 provides an opportunity to reinforce targets, investment signals and mainstream energy efficiency into LGU plans and activities. Clear and time-bound sectoral targets can guide decision making and create a unified direction for energy efficiency investments in public buildings.

  2. ii. Strengthened building energy codes, as well as voluntary or mandatory green building certification schemes, for new and existing construction, can ensure high energy efficiency standards for public buildings. This should include building envelopes, material efficiency and efficiency of end uses.

  3. iii. In line with this, a strengthening and expansion of minimum energy performance standards for key appliances and equipment, together with energy technology lists (containing pre-assessed and pre-approved technologies complying with the desired efficiency standards) could be considered, and actively used in procurement processes.

  • The Government can continue to encourage LGUs in mainstreaming energy efficiency within their plans and activities through information campaigns, guidelines issuance and targeted training (e.g. for energy efficiency and conservation officers). The latter can be developed in collaboration and assisted by international development partners. Support to adopt, regularly update and monitor progress towards the plan’s objective will also be important.

  • The Government should also continue collecting data and information around government facilities’ energy profile in order to ensure regular monitoring and target adequate actions (including for LGU’s lagging behind).

Continue implementing capacity building and awareness raising programmes to support LGUs in availing of energy efficiency opportunities.

  • International development assistance could notably provide capacity building support for LGUs and financial institutions in key areas such as energy efficiency policies and savings potential for buildings, appliances and key end-use sectors. Other focus areas in need of capacity building are public procurement, origination and implementation of energy efficiency projects, access to capital markets, PPP for energy efficiency.

  • The PPP centre could be an interesting conduit to help deliver training on PPP for energy efficiency, building on the country’s experience in other infrastructure sectors. With support from international development partners, training and awareness campaigns can address different target groups ranging from policy makers/LGUs to technology providers and industry professionals, as well as financial institutions, commercial end-users and civil society.

Accommodate and expedite the procurement of energy efficiency projects – either through implementing specific carve-outs or rule change.

  • Recent regulation to allow the reuse of the proceeds of energy savings is a step in the right direction, albeit more is needed to encourage wide adoption of the scheme. In addition to information campaigns, other rules (e.g. limits to multi-year contracting or “mixed goods” procurement) could be usefully revisited to accommodate the procurement of energy efficiency projects through energy performance contracts.

  • In this regard, the government-led implementation of demonstration projects within the facilities of selected LGUs/Government entities could go a long way to trial and evaluate the impact of any possible rule change as well as to prove concept, given the limited capacity of the Government / PNOC-RC to support energy efficiency improvements in public buildings.

  • A specified number of LGUs are selected and funded on a competitive basis. For example, DOE may consider auctioning a predetermined amount to fund the pilot projects. The projects are selected on the merits of their proposals and judged by an independent panel of experts or advisers.

  • As a fully funded project by the national government budget allocation, the procurement process could be simplified by exempting the pilot LGU from the requirements of Republic Act 9184, to allow LGUs to engage in mixed contracts such as EPCs. Given sufficient flexibility to experiment on feasible structures and approaches, the pilot scheme could provide valuable lessons that could inform subsequent adaptations for future projects.

  • The next round of pilot schemes could incorporate the lessons from the previous round. The DOE may choose to repeat this process, until experience, track record and technical competencies are built amongst the public and private sectors for broader applications to the covered LGUs and government buildings.

The Philippines can explore opportunities to strengthen the private ESCO market and encourage more private sector involvement in energy efficiency.

  • The Philippines has a favourable regulatory environment for promoting ESCO models (UNEPCCC, 2023[9]). Building on this and drawing from international lessons learned, the government can evaluate the possibility of establishing an aggregator entity for public energy efficiency projects amongst LGUs, similar to existing alternatives in the private sector. This can help with the creation of a pipeline of public sector projects that can be implemented through private sector ESCOs.

  • Continuous capacity building measures, dedicated financing windows for ESCO projects, and potentially an Energy Savings Insurance (ESI) scheme adapted for public buildings, can also contribute to the creation of a more vibrant energy efficiency market.

Carefully evaluate opportunities to increase budget allocation to LGUs for energy efficiency, including private financing.

  • While sound public finances should remain a key priority, it will be important to ensure LGUs (particularly in less urbanised areas) have sufficient financial and human resources to comply with government requirements and targets. In particular, LGUs should be given enough resources to appoint an energy efficiency and conservation officer, or at least, mutualise that of nearby LGUs to lower transaction cost, when possible. This will be particularly important in the early stages of deployment of energy efficiency projects (to collect data, establish a baseline and identify opportunities) while continuing to diversify sources of funding over time (whether this be from concessional lending or directly from financial markets).

  • The size of energy efficiency projects tends to fall below the thresholds of lending of private banks. For government entities, borrowing is limited to state-owned banks, where LandBank and the Development Bank of the Philippines are the two qualifying entities. For the initial pilot projects, the funding needed may be met with budgetary allocations.

Increase awareness on the availability of dedicated financing windows for energy efficiency projects. Implement a strategy to tap into these resources and diversify the funding available to LGUs and private ESCOs.

  • As few LGUs have yet used external sourcing of funding (either bonds or loans), international development partners can educate and support LGUs in designing a robust and realistic strategy to tap credit and capital markets, including to fund energy efficiency projects. This can be complemented with international and cross-government experience exchanges. In line with this, the early inclusion of third-party certification could be considered to attract investors and create confidence.

  • Increased awareness on the available commercial funding and an open dialogue between lenders and energy efficiency project promoters can help LGUs understand the requirements and conditions of an economically viable project.

  • The creation of an Energy Efficiency Revolving fund (drawing for instance from the Thai model) could help ESCOs and LGUs access long term concessional finance and/or equity and, in its early days, help support the deployment of demonstration projects. Such a fund, could for example, be capitalised from a “real property” tax (also known as Amilyar).


[16] BLGF (2022), LGU Credit Financing, https://blgf.gov.ph/lguloans/.

[1] Business World Online (2022), “Energy dep’t touts savings from power conservation program”, Energy dep’t touts savings from power conservation program, https://www.bworldonline.com/economy/2022/12/27/495498/energy-dept-touts-savings-from-power-conservation-program/ (accessed on  April 2023).

[6] DoE (2022), List of ESCO Accredited Companies as of June 2022, https://www.doe.gov.ph/energy-efficiency/list-esco-accredited-companies-june-2022.

[7] DoF / LCEP (2021), The Philippine Sustainable Finance Roadmap, https://www.dof.gov.ph/wp-content/uploads/2021/10/ALCEP-Roadmap.pdf.

[5] Efficiency, C. (2020), Business models for energy efficiency - Energy Performance Contracting (presentation), https://c2e2.unepccc.org/wp-content/uploads/sites/3/2021/01/business-models-for-energy-efficiency-energy-performance-contracting.pdf.

[15] Environmental Finance (2017), Bond of the year: Municipal - Mexico City, https://www.environmental-finance.com/content/awards/green-bond-awards-2017/winners/bond-of-the-year-municipal-mexico-city.html.

[18] IDB (2020), Energy Savings Insurance: Advances and Opportunities for Funding Small- and Medium-Sized Energy Efficiency and Distributed Generation Projects in Chile,, https://publications.iadb.org/en/energy-savings-insurance-advances-and-opportunities-funding-small-and-medium-sized-energy.

[10] IEA (2021), Evolving Energy Service Companies in China.

[17] OECD (2022), Clean Energy Finance and Investment Roadmap of India: Opportunities to Unlock Finance and Scale up Capital, Green Finance and Investment, OECD Publishing, Paris, https://doi.org/10.1787/21b6e411-en.

[3] OECD (2022), First OECD-DOE Workshop: Unlocking finance and investment for clean energy in the Philippines.

[13] OECD (2021), Clean Energy Finance and Investment Policy Review of Indonesia, https://www.oecd-ilibrary.org/finance-and-investment/clean-energy-finance-and-investment-policy-review-of-indonesia_0007dd9d-en.

[11] OECD (2016), OECD(2016), OVERVIEW OF THE PHILIPPINES’ PPP FRAMEWORK AND PROGRAMME Meeting of the South East Asia Regional Policy Network on PPP, Infrastructure and Connectivity, https://one.oecd.org/document/GOV/PGC/SBO(2016)1/en/pdf.

[14] Philstar (2022), DOF: LGU borrowing capacity still underutilized, https://www.philstar.com/business/2022/11/25/2226207/dof-lgu-borrowing-capacity-still-underutilized.

[12] PPP Centre (2022), List of PPP projects, https://ppp.gov.ph/list-of-projects/.

[9] UNEPCCC (2023), Regulatory Barriers for Energy Service Companies.

[2] World Bank (2018), The Philippines: Options for Financing Energy Efficiency in Public Buildings, https://openknowledge.worldbank.org/handle/10986/29615.

[8] World Bank (2018), Transforming Energy Efficiency Markets in Developing Countries: The Emerging Possibilities of Super ESCO, https://openknowledge.worldbank.org/bitstream/handle/10986/30385/129781-BRI-PUBLIC-VC-ADD-SERIES-6-9-2018-12-9-31-LWLJfinalOKR.pdf?sequence=1&isAllowed=y.

[4] World Bank (2010), Public Procurement of Energy Efficiency Services: Lessons from International Experience,.


← 1. On 12 May 2023, the DOE issued Department Circular (DC) 2023-05-0009, or the GEMP implementing guidelines.

← 2. These cover: 158 public buildings for which the Department of Energy (DOE) had collected data as well as the walk-through audits of 20 buildings.

← 3. According to the definition by the Government of the Philippines, this is classified as an “energy efficiency and conservation” measure.

← 4. Economic Zone Authorities in the Philippines, promote and oversee established economic zones, which are intended to promote and attract foreign investments.

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